Contracts for star employees: The top five mistakes

Supposed star player Mario Balotelli’s employer Liverpool might now be checking the terms of his contract after recent performances

Be careful with bonus entitlements, and try to avoid long periods of notice.

Star employees often have high salaries and exceptional benefits, and may also have “special” provisions in their contracts that could cost you if things go wrong. Hiring big names is a fraught business at the best of times, as Liverpool’s signing of the underperforming Mario Balotelli reminds us. Here are five pitfalls to avoid when drafting contracts in today’s buoyant recruitment market.

REWARDS BY ANY MEANS

In the current political climate, where even a Conservative Prime Minister references doing business in “the right and responsible way”, employers can’t be seen rewarding financial performance that compromises ethical and corporate responsibility. If scandal erupts or instability hits a business, such an approach can damage your reputation. It can also cause legal problems when the company is trying to discipline the wrongdoers who argue that they’ve simply acted in accordance with the employer’s reward structures.

Rewards should be subject to appropriate corporate responsibility conditions, allowing for non-payment and clawbacks. The contract should also provide for disciplinary action, including dismissal, regardless of performance, where these conditions are breached.

CAREFUL WITH CASH

Employers should not rely solely on cash rewards for their star employees. They should also use non-cash rewards, preferably ones that are deferred and linked to the performance of the business.

You want your employees to be motivated not only by short-term gains, but also by the long-term interests of the business. In some sectors, this is already required by regulatory rules. It is also easier in practice to refuse or claw back deferred cash and non-cash benefits where great financial performance turns out to have breached the contract’s requirements.

WEAK PROTECTIONS

Star performers won’t stay with you forever, especially in an increasing mobile labour market. If you don’t include protections for business assets (confidential information, key clients and contacts) you risk paying a heavy price later. The consequences of failing to protect these assets can be devastating, putting client relationships at risk .

A LONG NOTICE PERIOD

Long notice periods are designed to discourage key employees from leaving, and to keep them out of the market for as long as possible if they do. But in practice, it’s difficult to force an employee to stay against their will. If things go wrong, you don’t want to keep an underperforming or difficult employee around for long, or pay them a large sum in lieu of notice. Long notice periods increase the cost of employee exits.

ENTITLEMENTS

Employers often fail to consider what happens if an employee leaves. If the contract contains a term allowing for payment in lieu of notice, wherever possible this should be limited to salary only, otherwise the employee will be entitled to continued benefits as well.

Does the bonus provision clearly state that the employee only receives a payment if employed and not under notice? If not, they may be entitled to at least a pro-rated bonus payment on departure.

Dan Peyton is an employment partner at international law firm McGuireWoods.

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